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01/07/2013 08:00 AM

Want Higher Energy Efficiency? Use Well-Targeted Incentives

SustainableBusiness.com News

In mid-December, the American Council for an Energy Efficient Economy (ACEEE) gave a presentation to the Senate Finance Committee on how to optimize the effectiveness of incentives to increase energy efficiency.

According to ACEEE's analysis, the most effective incentives specifically target advanced technologies policymakers want to be adopted, they need to be big enough to spur people to take action, and need to last long enough - generally about five years - to integrate them into the marketplace.

Giving tax credits for the purchase of Energy Star appliances, such as high-efficiency refrigerators, clothes washers, and dishwashers, have been very successful, for example. They were big enough to entice people to buy them, and as high-efficiency products gained market share, most major manufacturers began to produce them, spurring even more efficient products.

Tax credits have also been successful in spurring adoption of Energy Star homes, advanced residential HVAC equipment and hybrid heavy-duty vehicles. Tax credits for windows have been less successful, on the other hand, because they covered too many products, increasing the program cost but not leading to much impact.

“The most useful tax incentives target long-term structural changes in the market, using temporary federal assistance to build the market for energy efficient products so that tax incentives can be phased out. The market will continue to grow on its own, supported by other energy efficiency programs and policies," says Steven Nadel, executive director of ACEEE. “Adoption of these recommendations will result in substantial energy savings, large energy bill reductions, and stronger U.S. manufacturers and businesses.”

This approach contrasts with that used in the 1980s, which didn't work very well. Incentives were too small to induce people, to broad (covered too many products) and focused on easily implemented measures that individuals and businesses were doing anyway.

Instead, incentives need to raise the bar be given for stretching beyond the status quo.

Policy Recommendations

Recognizing there is likely to be a limited budget for incentives in the near future, ACEEE recommends:

1. Continue the current tax credit for efficient appliances, but update the qualifications so that only the most-efficient technologies apply.

2. Extend the current tax incentive for efficient new homes, but upgrade the qualification to introduce a higher energy savings tier

3. Increase the current tax deduction for new commercial buildings to help the market share grow for advanced buildings.

4. Add comprehensive retrofits for existing buildings to increase energy savings and to expand the number of contractors that can serve this market. This is covered in the proposed Commercial Building Modernization Act, which would provide incentives for buildings that produce energy savings of 20% or more.

5. Encourage higher efficiency levels for residential furnaces, boilers, stoves, water heaters, air conditioners, and heat pumps by building on the success of recently expired incentives. Raise qualification levels.